Investors Love Everything Despite Earnings Growth Decline

2019 earnings are very interesting because of the effect comparisons will have on growth. It’s very important to differentiate between actual bad earnings and weak earnings growth rates caused by tough comparisons.

Expectations are for just 0.65% earnings growth in Q1 2019 according to The Earnings Scout. However, growth is expected to be 10.95% in Q4. While Q4 earnings don’t come out for 11 months, which gives estimates time to fall, they still withstood the extreme pessimism from analysts in January and the first half of February. That same pessimism dragged down Q2 and Q3’s estimates to just 2.45% and 3.17% growth as the chart below shows.

Even if full-year 2019 earnings growth was just 0.65%, it still wouldn’t justify the bear market of late 2018. Earnings at least need to fall to justify a bear market.

Investors - There wasn’t a bear market in 2014-2016 even though there was an earnings recession.

Since estimates are usually beat, I expect to see about 3% EPS growth in Q1 and 6% growth in Q2 as of today. That’s far from an earnings recession. U.S. economic growth could rebound in Q2 because there won’t be a government shutdown and trade tensions are easing. However, it’s possible the European and Chinese slowdowns get worse.

(Click on image to enlarge)

There clearly aren’t hard and fast rules to earnings growth and bear markets because stocks fell 20% in late 2018 even though it wasn’t clear earnings would fall in 2019.

Plus, earnings growth was very strong in 2018. It’s fair to say this bear market wasn’t justified by earnings, but it still happened and we can’t ignore that. My best explanation is to say stocks should be bought when earnings estimates expect growth and fall slowly or rise.

Stocks should be sold if estimates crash to the point where growth is negative. Then you need to add the layers of valuation analysis and economic analysis to complete your opinion.